strategic commodity risk management

International conference The 8th of June

Pre-conference master class The 7th of June

Post-conference master class The 9th of June

Hotel Scandic Copenhagen

Strategic commodity risk management Pre-conference master class How should we report on and measure risk – what can VaR (Value at Risk) be used for?

Post-conference master class Financial instruments for managing commodity price risk

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Strategic commodity risk management The 7th - 9th of June at Hotel Scandic Copenhagen

The extreme volatility of commodity prices in recent years creates greater challenges than ever for procurement organisations trying to successfully manage cost risk. This was most recently stressed in the 2010 January issue of Emerging Risk Update from the Risk Integration Strategy Council in the US where executives cited commodity prices as the number 1 of top 10 risks! Raw material category managers are currently facing one of the most volatile markets in history, while category managers of semi- or fully-manufactured articles are experiencing sellers who forward price increases to the buyer almost instantly while maintaining high prices when the market is dropping.

As a CPO, you must be able to answer the following questions: ❙ ❙ ❙

What is your company’s exposure to commodity risk on each category?

What is your company’s net-exposure to commodity risk at portfolio level?

How does leading companies go about commodity risk management?

You can be quite sure that if your CEO has not yet asked you these types of questions, he or she will do so shortly – because risk management and particularly strategic commodity risk management is on top of the agenda at board level in most large companies.

Risk is the mother of cost and it is the amount and quality of the risk management efforts that determine the cost level for the coming years – if the proactive risk management efforts are insufficient, no kind of category management or sourcing

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activities can compensate when the prices has increased with e.g. 50-60% within a year's time or less.

Strategic commodity risk management therefore has to be integrated into your category management activities and processes in order to secure relative stability and predictability of company earnings. In a broader perspective, if done successfully, it positions procurement as a real strategic value contributor at board level and ensures procurement a more significant role in the company.

This year, DILF and Kairos Commodities invite you to the international Strategic commodity risk management conference in Copenhagen June 8th. In relation to the conference, you can attend two master classes – ‘How should we report on and measure risk – what can VaR (Value at Risk) be used for?’ on June 7th and ‘Financial instruments for managing commodity price risk’ on June 9th.

You have here a unique opportunity to upgrade your skills and obtain knowledge on how your company can be in the lead within strategic commodity risk management. The conference and the master classes provide you with an unparallel opportunity to: ❙ ❙ ❙ ❙ ❙ ❙

Get an overview of how other European companies are working with strategic commodity risk management Benchmark with the most admired companies – are you a leader or a laggard?

Network with peers from leading European companies Attend dialogues on the key issues and opportunities with peers and subject matter experts Equip yourself and your organisation with leading edge concepts for strategic commodity risk management Prepare yourself for the next big thing in procurement – strategic commodity risk management

Welcome in Copenhagen!

Who should attend?

Professionals who are about to engage or are engaged in working with commodity risk management in an enterprise risk management or procurement context. The conference and master classes address professionals at both strategic and tactical/ operational levels working with commodity risk at enterprise, category, and portfolio levels in the company.  Register for the conference at www.dilf.dk/tilmelding

programme

The 8th of June at Hotel Scandic Copenhagen

8.30 - 9.00 Registration 9.00 - 9.10 Chairman’s opening remarks

by Søren Vammen, CEO, DILF

9.10 - 10.10 Risk management in procurement – new challenges or new opportunities?

Recent years' extreme volatility in commodity prices has resulted in serious challenges for companies and those in procurement, who are working proactively to manage risk and costs related to risk. To explore these challenges further as well as the initiatives implemented by European companies, DILF, Valcon, Kairos Commodities and Aarhus Business School have carried out a commodity risk management survey. Focus has among other things been to identify how companies work with risk management in relation to commodity prices, how the effort can be enhanced, and what the potential is when working proactively with commodity risk management. ❙ ❙ ❙

What are the priorities regarding risk management?

Results and key issues of the survey – primary challenges and new opportunities within strategic commodity risk management in European companies What are the best companies doing differently?

by Morten Munkgaard Møller, Director, Procurement Practice, DILF and Assistant professor, Aarhus Business School, and Stig Jessen, Director, Valcon

10.10 - 11.10 Risk appetite and strategy: What is the use of VaR – Value at Risk?

Traditionally, risk management has been defined defensively, and consequently companies have spent too much money on hedging risks. Most companies have started working with risk appetite and risk strategy. This has led to a greater understanding of which risks to take on and how great these risks can be. One of the most applied ‘tools’ is VaR as this brings the advantages of dealing with all risks simultaneously. This means avoiding suboptimisation in connection with hedging risks, for instance. VaR also gives an opportunity to define risk appetite on a portfolio of risks and this is often the risk that is most relevant for companies to be aware of. ❙ ❙ ❙ ❙ ❙

Risk appetite Risk strategy Value at Risk (VaR) Advantages and limitations of VaR Optimal hedging and risk

by Frank Lyhne Hansen, Director, PricewaterhouseCoopers, external professor at Copenhagen Business School, and member of the Kairos Commodities Advisory Board

11.10 - 11.40 Break

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11.40 - 12.30 Managing risk on portfolio level by using VaR – Value at Risk methodology As many other companies, Danfoss experiences a growing challenge in managing commodity risk – not made easier by the growing volatility in commodity markets.

If you at the same time operate in a multi-divisional company with many decentralized business units, risk management becomes an even more complex task. Within the last three years, Danfoss has been working intensely to assess company risk by identifying and obtaining an overview of the company’s overall risk. For this, Danfoss has employed Value at Risk (VaR) in order to manage and articulate risk. Today, Danfoss uses VaR to manage risk at portfolio level and also to gain an understanding of how to communicate risk to management and stakeholders. Since 2007, Group commodity manager Jesper S. Pedersen has been responsible for managing commodity risk in Danfoss and he will among other things share experiences on the following: ❙ ❙ ❙ ❙

Measuring and managing risk at portfolio level by using VaR How to report and communicate commodity risk to top management Using the results from VaR to optimise commodity purchase Key learnings and next step

by Jesper Smith Pedersen, Group commodity manager, Danfoss A/S

12.30 - 13.30 Lunch 13.30 - 14.20 Commodity risk management – a lever to a competitive edge!

Findus Group is a leading European food manufacturer owned by the private equity company Lion Capital. In 2007, after having implemented category management and sourcing processes, the focus on commodity risk management was strengthened. The results have been remarkable and have re-positioned the procurement function as a real strategic lever of the company’s competitive edge. Focus has been on entering the supply market at the right time and with the right contract type as well as on linking commodity risk management on the supply side with strategic pricing on the sell side. ❙ ❙ ❙ ❙ ❙ ❙

Company background Why increased focus on commodity risk management?

Governance and procedures – how to integrate with other functions Market strategies Learnings and results so far Next step

by Frank Thorsen, Group purchasing director, Findus Group, UK

14.20 - 14.50 Break

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14.50 - 15.40 Applying commodity risk strategies at category level Diageo, the world’s leading premium drinks business, with brands such as Smirnoff, Johnnie Walker and Guinness, has an “Executive Working Group” (EWG) leading the company’s strategic management of commodity exposures. The EWG was created as a direct response to the needs for managing commodity price volatility and its increasing impact on annual trading performance, as well as for being able to clearly articulate the company’s management approach to key shareholders and to demonstrate clear and effective governance structures and processes in the company’s policy execution. The scope of the work fully encompasses all Diageo’s supply regions across the globe and has focused on all exposure types from directly bought in commodities through ‘embedded exposures’ and ‘pass through exposures’. Central to the EWG has been the target of creating an effective governance structure that satisfies the rigours of reporting in a large PLC environment while simultaneously creating the conditions necessary to allow fast and effective execution of pricing recommendations and delivering on the goal of creating value through effective timing of market participation. The presentation will share the EWG journey and experiences to date, including: ❙ ❙ ❙ ❙

A full definition of the company’s needs, objectives and attitude to risk Governance structure and processes at company level and category level Applying risk strategies at category level – from strategy to results – case on category level including hedging initiatives Key issues and challenges

by Andrew Roberts, Strategic category director, Commodities, Ingredients & Logistics, Diageo, UK

15.40 - 16.30 Panel session Chairman: Geraint John, Executive consultant, State of Flux, and former Editor-in-chief, CPO Agenda, UK

16.30 End of conference, refreshments and networking  Register for the conference at www.dilf.dk/tilmelding

Pre-conference master class

How should we report on and measure risk – what can VaR (Value at Risk) be used for?

The 7th of June at Hotel Scandic Copenhagen This master class will enhance your skills to measure, manage, and report on risks and thereby possibly lead to savings in the way you uncover and manage risks in your company today.

At the moment, not many companies are able to say what the risk of not reaching their expected results is or for that matter what the risk of deficit is and the reasons for it. That is often because most companies face many risks that can be difficult to compare and uncover.

Traditionally, finance departments have measured risks in relation to, e.g., interests or currency, but only leading companies also measure integrated risks – the overall risk. The desire to be able to measure risk, however, has today spread to other functions in the company, and many seek inspiration from the way finance has managed this. That also goes for procurement where risk measurement has become a focus area during the last years’ volatile markets. Leading companies, therefore, need to be able to measure their overall risk – are you?

The desire to measure the overall risk within procurement stems from the fact that risks often are very much leveled, which means that there can be great savings when integrating risk measurement and management.

Value at Risk (VaR) was first practiced in the larger US banks in the 1980’s in connection with the development and trends on the market for derived products. The birth of derivatives meant new and additional challenges for Risk managers since existing measurements on risks could not be transferred to derivatives. With VaR, banks have developed a measurement tool, usable for all types of risk, that can measure financial losses as well as different risk portfolios. VaR can thereby be used to measure risk across different areas of business and products, down-stream as well as up-stream.

VaR is defined as the biggest loss expected for a given confidence interval (e.g. 95%) for a given period of time (e.g. 1 day or 1 year).

The great thing about VaR is that it works on many different levels, right from a single risk source to an entire portfolio of risk. VaR is now the measurement referred to when talking about overall risk. This is especially the case in banks but also in finance and leading companies where VaR has become the way risks are communicated.

There are obvious advantages to VaR but also limitations, which will be analyzed further at this master class.

Who should attend?

This master class addresses Directors within procurement, CPOs, CEOs, Category managers, Risk managers, CFOs and others with interest in and responsibility for risk management in companies.

Pre-conference master class programme

08.00 Registration 08.30 Why should risk be measured? ❙ ❙

Introduction to risk management and measurement of risk Discussion of how the financial crisis has effected risk management

09.45 Break 10.00 Introduction to VaR ❙ ❙ ❙ ❙

What is VaR? How to calculate VaR Advantages of VaR Other portfolio risk measurements

12.00 Lunch 12.45 How can VaR be used?

Exercises and discussions of tools and methods ❙ ❙ ❙ ❙ ❙ ❙

Volatility; different types of volatility and modeling of volatility Correlations; modeling of covariance Historic simulation Modeling from the covariance approach, simulation, problems with non-linear products Stress test, scenario models Modelling of risk

At the master class, participants will be able to prioritize, which tools and methods should be worked with in depth.

16.00 End of master class About the master class leader Frank Lyhne Hansen, Director and leader of PwC’s strategy and risk team. Frank is cand.scient.oecon and has worked with risk management for 15 years and on many large projects at some of the biggest Nordic companies. Frank is also an external professor at the institute of finance at Copenhagen Business School (CBS) where he has been teaching risk management and finance at the highest level for 15 years.  Register for the master class at www.dilf.dk/tilmelding

Post-conference master class

Financial instruments for managing commodity price risk The 9th of June at Hotel Scandic Copenhagen

This one-day master class is a primer on managing and pricing ďŹ nancial instruments on commodity price variables. Commodity derivatives are traded in large volumes on organized exchanges throughout the world. We look at the different types of instruments (futures, options and swaps) and their risk management capabilities.

Underlying assets for commodity derivatives range from precious and industrial metals over all sorts of agricultural products to, e.g., electricity, oil and natural gas.

We will go through a number of cases and examples where commodity derivatives have been used (and abused). Setting up the right commodity derivatives position and pricing it will typically involve a bit of computer programming and course participants will to a limited extent be asked to work with problems of this type.

Microsoft Excel (and perhaps a bit of VBA code) will be used for this task.

Post-conference master class programme

08.00 Registration 08.30 - 10.00 Introduction and motivation General introduction of the risks, the markets, the instruments and their underlying assets: ❙ ❙

What are the risks and where do they come from?

Which instruments are available and where and how do they trade?

10.00 - 10.15 Break 10.15 - 12.00 A closer look at forward, futures and swap contracts on commodities ❙ ❙ ❙ ❙

Characteristics of exchange-traded commodity futures Hedging strategies involving forwards and futures Futures pricing Examples and cases

12.00 - 13.00 Lunch 13.00 - 14.30 Options on commodities ❙ ❙ ❙ ❙

Characteristics of exchange-traded options on commodities Hedging and trading strategies involving options Pricing options on commodities Examples and cases

14.30 - 14.45 Break 14.45 - 16.00 Touching upon more advanced subjects, eg. ❙ ❙ ❙

Structured financial derivatives on commodities Value at Risk (VaR) for commodity derivatives The numerics of derivatives pricing

16.00 End of the master class About the master class leader Peter Løchte Jørgensen is Professor of finance and head of the Finance Research Group at Aarhus School of Business at the University of Aarhus. He teaches general finance and investment courses and his research is focused particularly on applied aspects of derivatives pricing theory. He is an experienced lecturer at the executive education level and has served as a consultant to numerous private companies.  Register for the master class at www.dilf.dk/tilmelding

practical information

Venue and accommodation

Registration

Conference The 8th of June 2010 Scandic Hotel Copenhagen Vester Søgade 6 DK-1601 Copenhagen Telephone: + 45 3314 3535

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Pre-conference master class ‘How should we report on and measure risk – what can VaR (Value at Risk) be used for?’

The 7th of June 2010 Scandic Hotel Copenhagen Vester Søgade 6 DK-1601 Copenhagen Telephone: + 45 3314 3535 Post-conference master class Financial instruments for managing commodity price risk The 9th of June 2010 Scandic Hotel Copenhagen Vester Søgade 6 DK-1601 Copenhagen Telephone: + 45 3314 3535 Accommodation is not included in nor the conference or master class fee.

Should you require accommodation whilst attending the conference or master classes please contact the hotel directly.

Conference fee Pay in DKK: 4.975,- (€670) Member of DILF/Kairos subscriber Pay in DKK: 4.475,- (€602) Per extra participant from same company (member of DILF/Kairos subscriber) Pay in DKK: 6.475,- (€870) Not member of DILF/not Kairos subscriber Pay in DKK: 5.975,- (€804) Per extra participant from same company (not member of DILF/not Kairos subscriber) VAT will be charged at 25% according to Danish regulation.

Partial refunding can be applied for under certain circumstances.

Applications are handled by the Danish customs.

For further information please see www.skat.dk

Register at www.dilf.dk/tilmelding E-mail to mail@dilf.dk (please include all contact details)

Methods of payment Bank transfer: DILF, Nordea Bank, Erhvervsafdelingen Copenhagen west, Hovedvejen 112, DK-2600 Glostrup, Denmark, quoting delegate name(s) or invoice number.

Swiftcode: NDEADKKK Account number: 2217 3488 541586 (DKK) VAT number: DK 18 99 54 17 IBAN: DK1520003488541586 International delegates please note that bank charges should be added to the total amount due.

Cancellation and substitution For cancellations received in writing no later than 30 days before the event the fee with a deduction of 10% for administration charges can be refunded. A 50% cancellation fee will be charged for cancellations received in writing no later than 14 days before the event. Cancelations received in writing later than 14 days before the event will not be refunded.

Substitution is allowed at no extra charge. Please inform DILF of any substitutions.

Terms and conditions The fee is inclusive of programme materials and refreshments as stated in the programme.

Full payment is required within eight days from receipt of invoice.

Payment must be received prior to the conference/master class. A receipt will be issued on payment.

DILF reserves the right to change or omit event features, dates and venue. In case of changes DILF is not responsible for covering airfare, hotel or other costs incurred by delegates. In case of cancellation the paid fees are refunded, but above mentioned costs are not.

Master class fee Pay in DKK: 4.475,- (€602) Member of DILF/Kairos subscriber Pay in DKK: 3.975,- (€535) Per extra participant from same company (member of DILF/Kairos subscriber) Pay in DKK: 5.975,- (€804) Not member of DILF/not Kairos subscriber Pay in DKK: 5.475,- (€737) Per extra participant from same company (not member of DILF/not Kairos subscriber) VAT will be charged at 25% according to Danish regulation.

Partial refunding can be applied for under certain circumstances.

Applications are handled by the Danish customs. For further information please see www.skat.dk

DILF Danish Purchasing and Logistics Forum Vesterbrogade 149 1620 Copenhagen V Telephone: +45 3321 1666 mail@dilf.dk www.dilf.dk